Okay, thank you, good morning, everybody. Welcome to the Inghams results call for the full year 2018. I'm here today with Ian Brannan, our CFO, and Quinton Hildebrand, who will be acting CEO going forward, who I think are both known to all of you. I'll give you a quick overview of the results. Ian will take you through the financials, Quinton will provide an update on strategy, we'll have plenty of time at the end for questions. Summarizing today, we deliver another set of strong results for Inghams, with continued volume growth, continued earnings growth, very strong cash generation, leaving us in a really strong financial position. We're making very good progress on our strategy.
We're managing to address the various challenges provided by increasing feed prices off the back of the drought here in Australia, where we can't offset those costs, those costs are being passed through to the market in pricing. We're well set for the period ahead. We're also announcing today, I'll come back to it in more detail, the sale of our Mitavite horse feed business for AUD 59.5 million, subject to normal conditions precedent. We expect that to complete in the next few months. I'll go through the logic for that, essentially that adds to our balance sheet strength. Having advised at the last results call that we would consider capital management options in conjunction with the board, we've worked through those options, we're announcing today a capital return for approximately AUD 125 million in total or around AUD 0.33 a share.
Subject to completion of the Mitavite transaction, the board also intends to pursue an on-market share buyback of up to 5% of issued capital. Those things being done from a position of strength, where we have the financial strength to continue to invest in the business, also return that cash to shareholders. Turning to the results themselves. As I said, continuing to grow volumes, our earnings, deliver strong cash flow. Pleasingly, chicken remains the competitive protein, we continue to grow our chicken volumes at group level up 3.2% in the face of those cost pressures rising costs through to consumers, where we can't offset those costs. We're very much on track with our strategy implementation. We continue to see good progress.
We'll run through that in detail, essentially expanding EBITDA margins, particularly in Australia, which is helping, of course, to offset what's a more challenging New Zealand market. We are seeing the effect of rising feed costs in particular, flowing through to consumers ultimately, via our customers. We are seeing price rises probably averaging around the 7% or 8% over recent months. For instance, in the spot market, the wholesale channel, where you see a more immediate pricing effect, we're seeing very strong pricing there and prices up some 20% from their low points over the last 12 months or so in Australia. New Zealand is slightly different dynamic, which I'll come to, also starting to see some early signs of price improvement in New Zealand. Very strong operating cash generation, which I'll let Ian talk to.
More than 100% operating cash before the benefits of some working capital funding. I think we're running around 112% operating cash before any benefit of working capital funding. That's two or three years in a row now where we continue to convert to cash at a really good rate. That's both the nature of the business, but a credit to the people right across the supply chain and Ian and the finance team in particular. That puts us in a position with a leverage ratio right down at 0.7, even post the capital management initiatives that I've just mentioned, it'll go to 1.2 or 1.3 or something like that, but a very conservative ratio.
Project Accelerate continues to deliver, with the benefits flowing through, as we say, particularly in Australia, but also helping to mitigate some of the effects of the market dynamic in New Zealand. We continue to pursue each of the initiatives that we've been through before and will come back to, we've added the further processing network optimization, which we announced a couple of months ago. Quinton can cover it, we continue to work on further opportunities. There's still a lot of improvement in this business, certainly compared to international benchmarks, we know even from an EBITDA margin point of view that we've got further to do before we get to a level of performance that we'd be comfortable with. As I've said, we continue to invest in the business. There's been a lot of capital going over the last three or four years.
We'll start to see more of the benefit of that capital coming through with the new feed mill in South Australia coming online and new breeder facilities in New Zealand. We continue to invest in WA and elsewhere across the network. A lot going on in the business and very much consistent with what we would've talked about before. Turning to the financial highlights, Ian will go through the detail, essentially the arrows here all point the right way, which is the way I like to have it. We like to be growing poultry volumes. We like to be growing our EBITDA margin more, or growing EBITDA more than volumes as a result of the efficiencies that we're driving through the business and supported by increasing premiumization.
That translates to higher NPAT, as we've said, very strong cash generation, leading to increased earnings per share and ultimately a final dividend of AUD 0.116 per share. You will note that we continue to fund our own restructuring. We IPO'd partway through Project Accelerate. We said there will be restructuring costs over a couple of years, which we're absorbing. We were aiming to offset that through profit on sale and so on, that's what we've been able to do for the last two years. We've probably broken the back of that restructuring. It's pleasing to see that the reported EBITDA is slightly higher than the underlying EBITDA, which means that we've more than funded our own restructuring costs.
That puts us in that position with very strong cash on hand and with the Mitavite proceeds to come in, hence, moving on to capital management, which I'll come back to shortly. Just a quick commentary on the two markets, a story in two parts really. Australia, very strong performance improvement in Australia, to be frank, over the last three or four years, that's been our focus. The underperformance in the business was really in Australia, we're managing to continue to drive performance improvement in Australia through the core poultry business. We're seeing good margin growth considering the rate of price increases that are flowing through. Remembering that this is a relative game for us. Yes, there will be cost increases flowing through on poultry ultimately through to the end consumer. It's a relative game.
The other proteins will also be facing that sort of price or cost pressure. Of course, chicken is the most efficient protein. The other thing that happens is that as prices rise, chicken is relatively more attractive than the other proteins. We continue to be confident about continued volume growth in poultry, and that's been the case through the first six or seven weeks of this financial year. For instance, we've seen no change in momentum in that regard. Within retail, we've seen some of those price rises flow through. For instance, I think the increase in the barbecue bird got some attention a few months ago, where there's approximately 12.5% price increase from AUD 7.90 or AUD 8 to AUD 9. That's had some moderating effect on the volume, overall volume continues to grow across our business.
Strong performance, we are driving harder at premiumisation now within Australia as well. Good volume performance in quick service restaurant food service and the wholesale channel, driven by strong demand. As we say, the wholesale channel is a lead indicator of what's happening with pricing, there's been some very strong pricing in that channel over recent times, in part helped by the demise of at least one of the small players. As we've commented before, in a competitive world, some of these rising costs where the smaller players can't offset through efficiency, increases the pressure on them. That's a double-edged sword for us, obviously, because some of them are customers in our third-party feed sales, we are seeing, or you'll see the volume effect there, primarily of Red Lea, a small chicken producer in New South Wales who are now defunct.
We lose the volume from a feed point of view, it obviously helps support the market dynamic. That sort of pressure will continue on the smaller players from everything we can see in the marketplace. We're also very much focused on utilization and profitability in our third-party feed business. We'll continue to see some rationalization within that segment for a while. Overall, improving profitability while we're doing it. Turning to New Zealand, very different market dynamic a story actually in two halves. A strong first half over there, then ramped up oversupply really, a factor in the second half, which we would've talked about at the last results we've seen flow through. The team in New Zealand have done a good job to hold the result in line with the previous year.
There's some signs of price increases in that market. From a conservative point of view, we're not really expecting change in the market dynamic. While we are very much focused on what we can control, we're driving premiumization, we're driving operational improvement. We continue to manage working capital very well, inventory levels and the like in that market. The reality is that with the largest competitor in that market subject to strategic or ownership uncertainty, that it still is yet to resolve. On the basis that they can't continue destroying value the way they are, then either a new owner will take them over, or there'll be some change in approach there, one would have to assume. In the meantime, we're getting on with running our own race and controlling our own business. It's much harder work in New Zealand.
The third-party feed segment in New Zealand is relatively strong and particularly off the back of dairy feed volumes and good solid third-party chicken feed sales, somewhat different to the Australian market. Doing a good job in difficult circumstances in New Zealand, but looking forward to some change in the market dynamic over there. I'll now hand over to Ian Brannan to run through the financial results.
Thank you, Mick McMahon, and good morning to everybody. I'm on page eight, which is titled Profit and Loss. Core poultry volume growth is 3.2%, together with the Accelerate benefit and the cost pass-through. Our gross profit increased by approximately AUD 20 million, which is about just over 4% year-on-year. That now shows a gross profit percentage of just over 20%, which is effectively two points ahead of where we were just before listing. The underlying EBITDA, so this is the EBITDA that excludes profit on sale of asset and restructuring, grew AUD 14 million year-on-year, and that's about 7%. If you look in the appendix on page 19, titled EBITDA Reconciliation, that details a list of items that are in both the profit on sale of assets and the restructuring. The underlying NPAT, again, excluding profit on sale and restructuring, at AUD 112.5 million, grew 10.3% year-on-year.
A reported NPAT of AUD 114.6 million and the corresponding earnings per share of AUD 0.308 grew 12.4% year-on-year. The increase really in that NPAT reflects a couple of things. One is the reduction in financing costs, obviously due to the amount of cash that we've been investing. Also the benefit of a historical tax credit of AUD 3.1 million, and that goes back to 2009, and highlighted previously at the half-year results. On page nine, which is titled the Cash Flow and Balance Sheet. Cash conversion, as Mick McMahon spoke, was actually 123%, but that included the inventory financing. Operating cash conversion excluding inventory financing of 112% is, again, another strong result. The capital expenditure of AUD 61 million was in line with expectations and lower than the prior year, as previously said at the previous calls.
As a result of the strong operating cash flow and the proceeds from the asset sales, the net debt reduced to AUD 145 million at a leverage of 0.7 times. The business continues to generate strong cash flows. It allows dividends to be declared at the top end of the policy, and with a cash balance of AUD 273 million, allows the board to consider a number of options of both continuing to invest to grow the business and obviously the capital management opportunities that Mick highlighted. With that, I'll hand back to Mick. Thank you.
Thank you. As I've said, we continue with our Project Accelerate focus, and I'll hand over to Quinton to recap some of that.
Morning to everybody, thank you, Mick. This year, Inghams is celebrating 100 years, and it's a business that's been built on a strong culture with emphasis on safety and quality. Whilst we've been modernizing the business in recent years, we continue to focus on the values that ensure consistent culture and behaviors across our 8,000 employees. Really, this is a cornerstone to our strategy. If we look to page 12 in the handout, at the core of the strategy is Project Accelerate. Now three years into the project, I'm pleased to see that it continues to unlock value, that has allowed us to continue to mitigate the cost of inflation, become more competitive in our offering to customers, and as you see in the results, continue to grow profits.
Those who've been following the business for some time would be all too familiar with the slide reflecting Project Accelerate. What you would notice is that we've added another tier on the top as we've identified further opportunities to create value, which we'll be working through during the balance of this year. If we move on to the next slide, I thought it would be useful just by way of an update to highlight four of the initiatives that are currently underway, just to give you a bit of color and flavor as to how the value is being unlocked within the business. Within the coming financial year, we will be installing automated deboning equipment at our Te Aroha primary processing plant in New Zealand.
This will generate commensurate labor benefits, and this is similar to what was undertaken two years ago within the two big primary processing plants here in Australia with good success. We work further on in the year ahead, continuing to optimize our network. You'll recall, 18 months ago, we closed one of the processing plants in New South Wales, and that led to an increase in volumes through our operations in Queensland and South Australia with unit cost advantages. Now, as we continue to grow the volumes, we are in the process of doubling our volumes in Western Australia, and that is giving us the benefit of moving from one shift in our primary processing plant to a second shift, again, with unit cost benefits and benefits for the customers, given that we're moving towards self-sufficiency over in Western Australia.
Another area of progress, which will start to generate benefits, is improving the productivity in Victoria. Victoria was historically one of our more expensive operational states. But with good work in the productivity within the primary processing plant, as well as rebasing the grower contracts and the grower performance, we're now seeing that state is more comparable with our production in other states and making that an investable proposition for further growth. Then finally, just to reiterate the announcement in June of the consolidation of our further processing network in Australia from four down to three plants. Again, lowering unit costs and putting us on track for this to be completed in February. All in all, we're pleased with the progress that we've made, and you'll see that coming through in the underlying results. But most importantly, we have a strong opportunity pipeline ahead of us.
If we move over to the next slide. We're just calling out, as Mick has indicated, rising energy and feed costs. Similar to other industries, we're having to deal with rising energy costs. Where we can't offset these, we have had to pass them through onto the customer. In the short term, we've sought to manage our usage and have locked in gas and electricity prices beyond the current financial year. In the longer term, when undertaking investments, we are pursuing energy-efficient capital investments to make sure that we're future-proofing. On the feed front, with the onset of the drought driving feed prices up, we've maintained our forwards cover at nine months. And as feed prices continue to rise, we're needing to pass that through to customers. That's either happening through the pass-through mechanisms that we have contracted in contracts, and that's roughly 60% of our volumes.
Alternatively, direct through negotiations and through the spot market pricing mechanisms. Finally, as Mick has indicated, the impact of feed prices is affecting our third-party feed business. During the financial year in question, we did lose one of our third-party customers in Red Lea. But other than that, the third-party feed business is managing to pass through those increased grain costs and maintain the margins. If I move then to the last slide I will be covering, and that's an update on the feed strategy. The strategic review of our feed business was foreshadowed previously, and we're pleased to announce that we've made good progress. This is essentially towards securing self-sufficiency for our own poultry operations, as well as ensuring better utilization of our assets and profitability of this business segment. In Murray Bridge, we are commissioning, as we speak, the new greenfield feed mill.
Once complete, that will take us to self-sufficiency in South Australia. Earlier in the year, we acquired the Wacol mill up in Queensland. Again, this will allow us, when contracts finish in the coming months, for us to gain self-sufficiency in Queensland. Work is progressing on the greenfield mill in Western Australia as well, as we are taking the opportunity, having sold the Wanneroo site, to upgrade and position ourselves for the future with a new greenfield mill. In the dairy business over in New Zealand, we have added resources, which at the same time as the higher milk price, is allowing us to grow sales volumes, which is pleasing. Then, as Mick has mentioned, the sale of Mitavite to Adamantem, both as this is not within our strategic focus and the transaction being earnings accretive for Inghams.
Our feed strategy review is ongoing, and we are pleased with the progress to date, but we will update you as we progress. Thanks. I will hand back to Mick.
Thanks, Quinton. Just to finish, the last couple of points. First of all, on capital management, as we said at the previous results, the board would consider capital management. A capital management strategy will have two components that were settled upon following independent advice and working through the various options. Firstly, a capital return, as I have said, in the order of AUD 125 million or around AUD 0.33 a share. That will be subject to a ruling from the ATO, which process will be underway over the coming months, and we will provide an update at the AGM. But we expect that to complete, if you like, or to flow through to shareholders somewhere in the December or January period. But certainly in the next 6 months or so.
Secondly, off the back of the Mitavite sale, subject to that completion, which we expect in the fourth quarter of calendar year 2018, the board intends to proceed with the net on-market share buyback of up to 5% of issued capital, and Macquarie Securities has been appointed to manage that buyback. This is, as we have said, you have heard from myself and Ian on the financial position of the company, and Quinton on the strategy, where we continue to maintain the capital investment flowing through into the business. This is fundamentally about returning that cash to shareholders, and we will provide more updates as the process plays out, but a two-pronged capital management strategy. Finally, turning to outlook. We expect the demand for poultry products to continue to grow. As I have said, that is what we are seeing through the first part of this new financial year, where we are tracking well.
Although there will be inflationary pressures through to the consumer on chicken, it's a relative game, and there'll be more cost going through on other proteins. While, as Quinton has said, we'll continue to try and offset that inflation where we can, but ultimately it passes through where we can't. We've demonstrated that we're able to do that. Strategy implementation remains on track, and Quinton will pick that up and drive it from here. As I said, we expect the continuation of the market price increases, remembering that 60% or so of our volume, that's a mechanic, price through mechanic in place. On the balance, for instance, which includes the wholesale channel, we're seeing those price increases flow through very quickly. The logic for that, or if you like, the competitive logic to that is that we're covered out nine months or so.
Smaller players in particular are not covered forward or not for any significant length of time. They need to pass through those cost rises very quickly, and they put a lot of their volume through into the wholesale channel. What you see in the wholesale channel is a lead indicator, if you like, of what will flow through our various price mechanics. New Zealand market dynamic, as I say, we're focused on what we can control. A little bit unpredictable as to how that will play out. We'll keep doing what we're doing. I suppose the upside is that if we can return to a more normal market dynamic in that country, then there should be upside for us.
Apart from that, there's some change in New Zealand tax legislation, which Ian can explain as we go through the roadshow, but essentially increases our effective tax rate from over there, and our dividend policy remains unchanged. In summary, good strong results. Essentially, continuing to do what we've been doing for a while, and we are looking forward to that continuing. Thank you very much. We'll stop there, and we'll go to questions.
Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you wish to ask a question now, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Craig Woolford from Citigroup. Please go ahead.
Morning, Mick. Morning, Ian and Quinton.
Hey, Craig.
Hey, Craig.
Hey, Craig.
Hey, guys. Just in terms of the pricing environment, you certainly had a good June half year where there was some price pressure coming through on feed. What are you seeing at retail from major customers? In terms of reflecting the price increases that you're passing on to supermarket customers as well as QSR.
Yeah. No, thanks, Craig. I'll try and give a bit of a flavor of that. Obviously, our role is to manage our pricing through to customers, after that they make their own decisions. I'll try to give you an answer without commenting too much on specific customers, although some of it is fairly public. If I take the Barbeque Bird example, which I mentioned, then increasing from AUD 7.90 or AUD 8 is roughly 12%, 12.5%, whatever that is, 13% price increase. That flowed through, and both of the major retailers moved their prices after, in our case, we flowed through feed price increases to those customers under our various arrangements. Secondly, more broadly, we're seeing across the board price increases, we believe not just from us, but from competitors to the extent to which we are aware, but that market feedback and so on.
Of course, all chickens eat pretty much the same feed, so they're seeing the same sort of price increases. Without being too specific, we pass through those either on a quarterly or a six monthly basis, typically, depending on the arrangement those price rises have gone through. After that, it's up to the retailer. I guess the public thing that you will see, this is where I have to be careful about not talking about our customers, but obviously Coles, it would seem, is playing a game of trying to generate a good competitive sales number. We're probably seeing less price point movement there than through other retailers. I guess the point being that our job is to do what we can to offset those prices, pass them through where we can. After that, it's up to the customer. That's on the retail side.
Across QSR and food service, it varies by customer. Essentially, anyone in the chicken game is used to feed prices going up, feed prices going down. It works its way through. As I've described, the wholesale dynamic is much more immediate than we've seen in Australia. We've seen price increases of in excess of 20% off their lows.
Okay. That's a comprehensive answer. I did join the call late, so I apologize if you have gone through this, but in the appendix, there's the EBITDA reconciliation, slide 19. I just wanted to understand there's restructuring, farming exits, network, crossover costs. Just wanted to get a feel for what we should expect in FY 2019 in those sorts of areas.
Yeah. Look, I'll frame this up and then Ian can comment if need be. Look, what we said a couple of years ago or through the IPO process is that we were partway through the Accelerate process, that there would be restructuring, and that we'd try and fund that restructuring through our own profit on sale and cash generation. That's what we've been able to do. While there may well be new initiatives in the future, as we sit here now, we would expect restructuring to moderate significantly in terms of the known initiatives under the Accelerate program. Of course, if there's different approaches in the future, that can be discussed. In a business of this size, we would expect on a regular basis, there'll be restructuring charges of a couple of million maybe that you would look to.
Either we can split out and report it, but effectively, a couple of million might be a more normal sort of operating cost. My own view of that is that it's healthy to have that sort of level of provision for that sort of level of restructuring, because you don't want to sit on things that you should deal with because you're worried about the restructuring costs. We've broken the back of the significant restructuring charges.
Right. The farming exits one in particular, what is the cost incurred for? There's AUD 4.6 million cost from the exit. Is that paying our contracts early?
From a strategy point of view, this is of course, where we're concentrating our production through Queensland, South Australia, starting to move Victoria, and we'll be increasing volume in WA, which leaves assets in New South Wales in particular. Ian, do you want to?
Yeah, there are two components of the cost, Craig. Where we have a lease, then we've got an onerous lease that we take up as part of the restructuring as we exit that. Again, that's in New South Wales. With the contractor, it's basically paying out the contract termination fee, effectively.
The predominant charge in there is closing down the breeder farms in New South Wales as we shift our operations to the other states.
Okay. My last one was just receivables was down 14% year-on-year. Can I just get an understanding as to the reason for the movement there?
It's simply good cash collection, to be honest. Yeah, we didn't do anything-
That's fair.
Yeah. I can say that in confidence.
Yeah, no, I mean-
I don't think there was any particular timing issues.
No, the timing wasn't there. We didn't do any kind of untoward deals or discounts or whatever else. It's like the` team, under Neil who's steady, did a fantastic job of cash collection. In fact, it beat our expectations. Customers we didn't expect to pay that did.
I guess what's behind that though, Craig, is that, remember, we've moved it from a family business who ran the business very well, but weren't terribly focused on some of those things. It takes a little while, i.e., a few years, to really get your systems working and your policies working and procurement working in tandem, which is on the other end of the ledger. There's a series of things which come together there, not just on receivables, but overall working capital management.
Okay, great. Thank you. Thanks for your feedback.
Thanks, Craig.
Thank you. Your next question comes from the line of Paul Buys from Credit Suisse. Please ask your question.
Morning, guys.
Hey, Paul.
First one, just a quick follow-up on that one on the retailer price move. You described the dynamic there, and in many cases, you moving and other retailers go after you. Just curious if one looks at the lag in terms of the feed cost impact on your own cost base, and when you then get to move, and thinking specifically in some of those areas where you've got longstanding relationships, say, in the QSR segment, but you might not necessarily have something as defined as in other contracted areas. Just interested to know lag, if anything, and how you see that lag playing out, if there is one, in first half, second half next year.
Thank you. Let me take that in two or three steps. The first one, through to, well, any customer, really, but where we have a price mechanic, as we've said before, you can get a little bit of price timing. Fundamentally, what happens is that movement in feed price, say, over a half, converts through to a price adjustment at the start of the next half or the quarter. It may be July or October. To the extent to which that lines up with our forward cover, i.e., if we're buying nine months forward, then they're roughly in the same timeline. As feed price increases come through, you should start to see the adjustment. In other words, we effectively get a lag because we're buying forward that nine months. There is room for price timing, particularly to get rapid movements.
What tends to happen is you probably get squeezed a little bit at the end of a half, and then you get the price rise through at the start of the next half, and so on it goes. Now the reverse will be true when grain prices will come down, and when they come down, you might get a bit of price planning the other way. If you wanted to put a number on that, and I probably shouldn't, there's probably AUD 5 million or AUD 8 million that might have that impact. It's always a bit hard to put a number on it, just to give you a sense. That can unwind when it goes the other way. Fundamentally, that's a mechanic that we're very pleased to have, if you like.
On QSR, well, maybe it shouldn't be too specific, where we don't have a price mechanic, yeah, it's a discussion with the customer. Obviously, whether you're a retail customer or QSR customer, we'll do our best to keep our customers competitive while doing what we need to do. Sometimes that can be, we pass through the mechanism, then provide some promotional support or do something on it to assist, particularly where it might help us move key SKUs that we want to move. It's not hard and fast. We'll work with our customers to mitigate the effect where we can. The combination of all that, bit of price timing, bit of mitigation, has probably squeezed us a bit. Fundamentally, there's been very significant price rises flowing through, and we expect that to continue through this half.
Got it. Thank you. Just on the New Zealand business, I guess you called out the market dynamics there and being pleased that the overall result was held flat in those conditions. Having said that, there's obviously quite a big shift between the first half and second half in terms of EBITDA performance. Just wanted to get a feel for, again, I know you've got a conservative outlook for next year, but there'd be quite a big difference between extrapolating that second half performance versus the whole year performance. I'm just trying to get an idea of how long that second half momentum goes through, because obviously if you extrapolate that, then you'd be looking at a sizable step down next year.
That's why we're a bit cautious in our commentary. If you like, our internal focus is that we're not assuming an improvement in this half in New Zealand, but we are assuming an improvement in Australia. One's carrying the other, I suppose. We'd be looking for improvement in the second half, and that'll be partly because there'll be more self-help we can do for the second half, just in terms of time, some of which Quinton covered. Essentially, that's our logic. We're not assuming an improvement in this half. Your guess will be as good as mine as to what happens around the major competitor there, I think it's well canvassed, the challenges that they have or they've imposed on the market or whatever view you want to take. We would look forward to a change in dynamic there.
Got it. Thanks. Last one from me, just on Accelerate 2.0. You haven't put it in, just wondering if you can give a little bit more color on expected CapEx outlay and/or return on CapEx for the 2.0 initiative.
I'm probably going to help Quinton here by saying he'll talk to some of that next time, and we'll give him time to get his feet more under the desk, I suppose. Obviously, he's been heavily involved in all this all the way through, they are primarily operational improvement initiatives and not CapEx, would be the overarching comment I would make. We'll give him a bit of time to put some numbers to it.
Understood. Okay. Thanks, guys.
Thanks.
Thank you. Your next question comes from the line of Michael Peat from Goldman Sachs. Please ask your question.
Morning, Mick, Quinton and Ian.
Good morning, Michael.
Just on the feed supply side, obviously, with the lower wheat crop here, you're having to source more offshore and what sort of impact is that having on cost with currency and things like that?
A couple of things. First of all, I guess it's all factored into our effective feed price, which flows through our price mechanisms. In other words, that includes the price of raws, the shipping, and basis points, et cetera. What happens in the feed dynamic is it's really New South Wales and Queensland, obviously, under the most pressure. South Australia, even Victoria and Tasmania is small, but reasonably okay. Not great, but reasonably okay. WA is quite strong. What we're seeing is flows of feed from the west coast to the east coast. If you look back at 10 or 11 years ago when that last happened, that primarily fills the gap in Australia, and if you look at the tonnages, it will go pretty close to filling the gap.
The second lever we have is that we procure grain in Australia for New Zealand, and it's easier to import corn, for instance, or other feeds into New Zealand than it is into Australia. We can import into New Zealand and hold or redirect the feed that would've been going to New Zealand through our own use here. They're the first two things that happen. Imports, while we prepare for imports, and there's a quarantine process around that you work with Canberra on, we're prepared for that. We're not there yet.
Great. Thank you. Just maybe for Ian, just CapEx for the year we're in, what should we expect there?
Yeah, I think, we did circa AUD 60 million. I think what we're predicting this year is circa AUD 75 million.
While there's a few moving parts in there, some of the investment into the New Zealand business that Quinton touched on and that I would call some of our self-help, that probably accounts for most of the step-up there.
What would you call the maintenance versus additional projects split on that?
Probably that AUD 60 million-AUD 65 million is your regular CapEx, and we're probably putting an extra AUD 10 million into New Zealand, that sort of AUD 10 million-AUD 15 million into New Zealand.
Got it. Thank you. That's all I have.
Thanks, Michael.
Thank you. Your next question comes from the line of Matt Nacard from Ethical Partners. Please ask your question.
Yes. Good morning. Thank you, guys.
Hey, Matt.
Just two very quick questions. Just on the third-party feed business, you've talked a lot about that, and you've talked about price rises and things like that. Can you just comment to volumes? Often in drought times, prices go up, the volumes go down. Any comment on volume to the third-party feed business over the half?
Yeah. Really in two parts. In New Zealand, the easy one, they've been growing, and that's because dairy feed is a key component of our business there, and dairy feed volumes have been strong off the back of stronger dairy prices, stronger dairy fundamentals, and our third-party chicken feed sales have been quite stable over there. In Australia, we've seen a drop-off in our volumes. In fact, we put that in the pack there somewhere on the Australian segment that's called out there, where feed volumes are down 16, 17%. The majority of that is the demise of Red Lea, which, as we say, has a benefit in terms of the poultry market itself. It's hard to break out what would be the effect of rising feed prices versus Red Lea itself. Rising feed prices were a factor, of course, in Red Lea's demise.
We should also add, as I think both Quinton and I have, that the third-party feed business in Australia needed some attention, and focusing on it as a business in its own right and driving profitability and all the rest of it. Some of that volume is also because we're choosing to run the business a different way. I think third-party feed sales, well, we'll get some cycling still of Red Lea, I suppose, that will still flow through for some time after that. Perhaps third-party feed sales will stabilize, but we still have some work to do to improve utilization, particularly in New South Wales. As per the farming answer, as we've shifted production to the other states, we've probably long feed mill capacity in New South Wales. We deal with some of that with the Mitavite sale, even though it's horse feed.
we've got a little bit more work there to do.
Okay, thank you. Just a quick question on that AUD 5 million-AUD 8 million impact or the number you called out recently
Yes
as to the gap of, I guess, the impact of feed prices versus what you couldn't recover. Just to be clear, was that for the half or the year or?
It essentially impacted the second half, it's my estimate, essentially it's where we've chosen to moderate our feed pass-through mechanisms in the interest of working with our customers. Remembering that we've passed through, I'll probably get the numbers wrong, but AUD 50 million or AUD 60 million in price increase. In fact, it's more than that. Yeah. It's a small percentage, but it's where we've chosen to moderate or to work with our customers on promotional funding or other things just to try and smooth the passage. It's an eyes wide open choice that we make.
Yeah.
Yeah.
Okay, good. Thank you. Appreciate that.
Thank you. Your next question comes from the line of Aryan Norozi from UBS. Please ask your question.
Hi, guys.
Morning.
Morning. Just the first one for me, could you please give an update on, in terms of your cost out progress? I think in the first half, you said you'll be at about AUD 140 million-AUD 150 million by the end of this year. Is that still the case or is it more or less?
Yes. No, it's still very much the case. We're tracking on a slightly ahead of those numbers, before you get to some of the newer initiatives that Quinton talked about, and he rattled through. Essentially, I guess because we've been talking about them for 2 or 3 years now, but we continue to focus on automation, we continue to focus on labor efficiency, getting the benefits of the more flexible EBAs, as Quinton has said, both automation and that labor focus really switched to New Zealand for the next little while. We were obviously very focused in Australia for the last few years.
Yeah.
Most of the network rationalization is done, although we're still in the process of sorting through or implementing the further processing network optimization that we announced a couple of months ago, and a bit of work to do in New South Wales feed mills. That won't be a cost anyway. It's just looking at reducing our asset base there. The other initiatives, I won't go through. Essentially, we're tracking nicely on those plans, where we're getting towards the end of the first wave of Accelerate that we talked about through the IPO, and Quinton is working with the teams now on Accelerate 2.0, which we've touched on, but we'll give him a bit of time to quantify some of that.
Just to confirm that the Project Accelerate overall with the phase 1 and 2, it was still AUD 150 million to AUD 200 million. Is that still the case?
Yes. The first wave, which we would quantify it in detail, was AUD 160 million. We said there's about AUD 40 million of other things, which included things like the FP network rationalization, which we recently announced. Yes is the answer.
Yeah.
There's still some benefits of that to flow through in a run rate sense, before you get to the newer initiatives that Quinton will drive.
Yeah. Just one in terms of your price increases, again, conscious if everyone's asked this, in terms of the magnitude, I understand you've got price increase across the majority of volume, what's the magnitude been like? Has it been enough to offset the price increase, or has it been half of what is needed?
No, absolutely it's enough to offset the price increase with the exception of what I've talked about, where we choose to moderate around the edges a bit.
Yeah.
You're seeing no sort of Well, maybe not everyone's across it, you're seeing, from a low point, 18 months, two years ago, you're seeing a very significant increase in the wheat price from maybe in the low 200s to the high 300s, pushing four, that sort of number. That's depending on the state. It can vary, that can be up to 30% of your cost of goods. You need to be recovering six, seven, 8%, that's what we've recovered. Except where we've chosen to moderate. That's the reasons I've said. That to some extent is offset by very strong wholesale, a channel where we have a competitive advantage as prices rise because we're covered long, we're protected against some of that price increase, certainly our smaller competitors aren't.
Yeah. Sorry, just in terms of the split between QSR and supermarkets or your retail side of things, could you just give a bit more color around the price increase across those two channels? Has it been easier or harder in QSR or?
Look, it works differently might be the answer. Retail is our biggest channel and the one we focused on the most. Interestingly, we've probably been growing the wholesale channel more than the others, which is partly because as we keep saying, the pressure on the smaller players provides opportunity. QSR are slightly different because there's a much stronger mix of FP product within Most of what we talk about is fresh chicken, by the way. We should probably say that. FP product, yes, while the cost flows through, it's also a higher price point, higher margin segment, tends to be a little bit more stable, the pricing in that regard, and QSR has a much higher FP mix than fresh chicken. It's different. I wouldn't say one's harder or easier. I wouldn't want to give the wrong impression. We're not just jamming through price increases.
We work with our customers where we can to either offset those increases or mitigate the effect of them.
Yeah. Just final one from me. Could you give some color around how big the horse feed business was from an earnings perspective or just any sort of idea?
Yeah, I'll give Ian a sense. I mean, strategically, of course, it's a separate business, and obviously Inghams, you can understand with their link to horses and racing that why we might have been in it, there's not too much connection to the rest of the business. Ian, do you want to give a bit of profile?
In terms of the business-
Well, I think we're selling for AUD 59.5, the earnings that we're selling-
Yeah. I mean, basically AUD 59.5 is circa 9.5x EBITDA in terms of its earnings. Obviously from a perspective where we sit today, it's accretive. We would sit circa 7.5x.
Yeah.
Sorry, is that EBIT?
Yeah, EBITDA.
Yeah, EBITDA. Yeah.
Yeah.
Perfect. Thanks, guys.
Thank you.
Thank you. I'll now like to hand the conference back to today's presenters for closing remarks. Please go ahead.
All right. Thank you very much. I suppose I should just acknowledge, I'll be signing off executive capacity this week and handing over to Quinton, but I'll be continuing as a director for a while and doing my best to support the team and ensure continuity. I look forward to catching up with some of you over the next few days. Thank you for your support as investors or otherwise over this time, and we'll hand over to good hands in Quinton and the team. Thanks very much.